26 May 2014

Ireland, Dublin

  • Equity allocation for Irish pension schemes remains at 44%
  • European pension funds ahead of Irish schemes in allocation to alternative assets – 9% across Europe, compared to 6% for Irish pension schemes
  • Catch-up is required by Irish pension schemes in the area of asset allocation

Asset allocation trends

The average equity allocation for Irish pension schemes remained unchanged at 44% for the second year in a row according to Mercer’s latest European Asset Allocation Survey, which tracks the asset allocation of €850bn of pension scheme assets across Europe. This trend was also present across Europe with European pension plans only marginally reducing their equity allocations over 2013.

Paul Kenny, Senior Investment Consultant at Mercer, said “Perhaps counter-intuitively, the weak economic growth of the last few years has coincided with exceptionally strong equity markets. The rising market, unattractiveness of bonds (due to the historically low yields on offer) and improving sentiment have been the key supports to equity allocations over recent years”.

Despite the pause in the reduction in equity allocations over recent years Mr. Kenny advised that the long-term trend away from equities is likely to continue in the years ahead.  Indeed, the strong performance of stock markets in 2013 has to an extent masked the continuing shift away from equities.  It would naturally be expected that equity weightings would have increased over 2013 as stocks performed strongly – but this has not happened. The static equity allocation is explained by schemes banking gains by trimming their equity allocations as markets rose.   Looking forward, he noted “almost 30% of European pension funds are looking to reduce equity allocations during 2014, and we expect similar trends in Ireland.

Lower equity allocations will be driven by two main themes:

(1)   Strategic de-risking in response to favorable market conditions – either banking equity gains or taking advantage of higher bond yields; and

(2) Diversification away from equities into alternative assets”.

Alternative assets

The move into alternative assets is part of a wider global trend as highlighted by Mercer’s “2013 Global Manager Search Trends report. Mr. Kenny said: “This report clearly shows that globally pension schemes are moving away from traditional asset classes into alternative assets.”

He added “Many markets have risen in response to the ultra-stimulative monetary policy pursued since 2009. As a result, prospective returns are arguably uninspiring across a range of more traditional assets. In turn, we have seen considerable pension scheme interest in alternative assets. This is evidenced by the total number of alternative assets selected by Irish pension schemes, jumping by a third over the year”.

Mr. Kenny added “although equities and government bonds remain key elements of Irish pension schemes’ asset portfolios we expect that more Irish schemes will embrace alternative asset classes to complement standard equity and government bond portfolios”. European pension funds have moved ahead of Irish schemes in the alternative asset area with the number of European plans having an allocation to alternative assets rising from 44% to 53% over the last year. The average allocation to alternative assets now sits at 9% across Europe, compared to 6% for Irish pension schemes, “so a degree of catch-up is required by Irish schemes in this area” Mr. Kenny added.

About Mercer

Mercer is a global consulting leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries, and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerInsights.